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Zee Entertainment
Bottomed out; Buy
Diversified rev mix should help sustain rating fall : Buy
Post 2Q results we tweak FY11/FY12 earnings est by 2-3% to factor higher than
expected losses in Sports business, partly setoff by strong growth in ad revs.
While stock has underperformed the Sensex by 18% over last 3m on concerns on
fall in ratings at its flagship channel- Zee TV, we believe impact likely to be limited
given revenue mix well diversified with subscription revs contributing ~40% to revs
and regional channels now contributing ~15% to revs. ZEEL remains one of the
largest broadcasting networks with strong presence across key genres- GEC,
Movies, Regional, Music and Sports. Forecast 22% EPS CAGR (FY11-13E) and
retain Buy with revised PO of Rs335.
Strong ad growth; Sports business drag margins
Ad revs rose 67% yoy, 7% ahead of our estimate. Growth rates include
contribution from regional GEC (RGEC) channels and hence not comparable.
Excl RGEC, ad revenues would have increased ~21% yoy, in our view. EBITDA
margins declined 140bps yoy, to 26.5% and was largely driven by higher losses in
Sports business. Ex Sports, margins expanded 400bps, to 41%.
Strong offerings across genres; 22% EPS CAGR
While it viewership share dipped recently in Hindi GEC, ZEEL continues to
maintain strong viewership share in Marathi (~37%), Hindi movies (~25%), and
recently regained its market share in Bengali GEC (33%). Management
highlighted it has lined up new content for Hindi GEC and would increase
programming hours over the next 4-5 months. Given strong offerings across key
genres, strong growth in subscription revs led by DTH, we forecast 22% EPS
CAGR over FY11-13E. At 18x FY12E valuations remain attractive. Retain Buy.
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